Tips from Tips: The Informational Content of Treasury Inflation-Protected Security Prices

48 Pages Posted: 16 Apr 2008

See all articles by Stefania D'Amico

Stefania D'Amico

Board of Governors of the Federal Reserve System

Don H. Kim

Federal Reserve Board - Division of Monetary Affairs

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Multiple version iconThere are 3 versions of this paper

Abstract

We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a "liquidity premium" that was until recently quite large (~1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS break even inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS break even rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS break even inflation rates are a useful proxy for inflation expectations.

Keywords: term structure model, inflation expectation, inflation risk premium, SPF, Treasury Inflation-Protected Securities (TIPS)

JEL Classification: G12, E31, E43

Suggested Citation

D'Amico, Stefania and Kim, Don H. and Wei, Min, Tips from Tips: The Informational Content of Treasury Inflation-Protected Security Prices. BIS Working Paper No. 248. Available at SSRN: https://ssrn.com/abstract=1120329

Stefania D'Amico (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Don H. Kim

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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